Cyprus: the `flea’ gets whacked again (Update)

Cypriots protest the EU bailout outside the parliament building in Nicosia this week (AFP/Getty Images)

(Updates market activity and vote by the Cypriot parliament.)

U.S. stocks slid today after the Cyprus parliament rejected a plan by the European Union and the International Monetary Fund that would have tapped insured bank deposits in Cyprus as part of that country’s bailout.

Besides being tiny, its banking system looks different from those in most other countries. Much of the big money deposited in its banks is from foreign investors, including Russians who have long been suspected of money laundering. Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them. If the current plan is approved, depositors will have lost that bet.

Worse, the strategy employed in the bailout of Greece — in which bondholders of its sovereign debt were paid less than face value — will not work in Cyprus. Cyprus’s banks own much of the country’s debt, so any effort to reduce that debt by forcing debt holders to accept less would only make the banks more troubled.

In addition, Cyprus’ economic impact on the rest of Europe is negligible. Sorkin again:

It is largely irrelevant to the global economy. Cyprus is tiny; its economy is smaller than Vermont’s. And the bailout is worth a paltry $13 billion, the equivalent of pocket lint for those in the bailout game.

The pocket lint analogy reminded me of another, equally demeaning characterization of Cyprus that came as the nation struggled to maintain its tenuous independence in 1964. As Christopher Hitchens recounted in his book on Cyprus, Hostage to History, when the Greek government wouldn’t go along with a U.S.-backed plan to partition the island, U.S. President Lyndon Johnson told the Greek ambassador: “America is an elephant, Cyprus is a flea. Greece is a flea. If these two fellows continue itching the elephant, they may just get whacked by the elephant’s trunk, whacked good.”

A year later, a military junta overthrew the constitutional government of Greece and later sowed the seeds of an assassination attempt that led to the ouster of the Cypriot president. The Cyprus coup , in turn, triggered a military invasion by Turkey, dividing the country. In the almost 40 years since the invasion, Cyprus has remained divided in a way that would be intolerable if it were any other European nation.

So it’s not surprising that when it comes to the banking system, the leaders of Europe are perfectly happy penalizing Cyprus in a way it wouldn’t be likely to penalize other countries. While many of the depositors in Cypriot banks are indeed wealthy Russians who will still come out ahead, given the high interest rates that Cypriot banks have been paying, others are average Cypriots, pensioners and savers who counted on bank insurance the same way retirees do in the U.S.

Ryan: The losses weren’t caused by government spending. The losses were caused because the banks invested in Greek debt. The banks have been flooded with Russians, mostly criminals, trying to hide their money. The value of bank deposits in Cyprus far exceeds the GDP of Cyprus.

I know it’s trendy to blame the government for all that ails people. In many, if not most, the government has absolutely nothing to do with it.

Wait – so what are they INSURED against? I thought it was against loss of funds.
This theft of funds would be “loss of funds”.
So shouldn’t they have to pay them for the loss of funds?
Take note people.
This is what happens when your Gov’t spends too much.

“Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them.”

Not to mention they cannot efficiently go to an ATM and remove the funds $1,000 at a time.

Further, since many deposits are invested long-term, most institutions have withdrawal limits as well the deposits might be tied in CD like bank instruments for high interest rates. I do not know about these guys.